Essex Property Trust, Inc. ESS is well-poised to gain from a robust property base in the West Coast market with several demand drivers. Efforts to leverage technology, scale and organizational capabilities are expected to drive margin expansion. A healthy balance sheet augurs well. Solid dividends aid shareholder wealth.

However, the elevated supply of apartment units in some of the company’s markets is likely to fuel competition and curb pricing power. A concentrated portfolio and substantial debt burden remain a concern.

Recently, Essex Property reported fourth-quarter 2024 core funds from operations (FFO) per share of $3.92, which beat the Zacks Consensus Estimate of $3.90. The figure also improved 2.3% from the year-ago quarter. Results reflected favorable growth in same-property revenues and NOI. 

Essex Property issued first-quarter and full-year 2025 guidance for core FFO per share. For the first quarter of 2025, Essex Property projects core FFO per share in the range of $3.86-$3.98, with the midpoint being $3.92. For full-year 2024, the company projects the core FFO per share in the range of $15.56-$16.06, with the midpoint being $15.81.

What’s Aiding ESS?

Essex Property enjoys a robust property base in the West Coast market, which is home to several innovation and technology companies that drive job creation and income growth. The region has higher median household incomes, an increased percentage of renters than owners and favorable demographics. Also, due to the high cost of homeownership amid still elevated interest rates, the transition from renter to homeowner is difficult, making renting apartment units a more flexible and viable option. 

ESS is banking on its technology, scale and organizational capabilities to drive margin expansion across its portfolio and bring about operational efficiency by lowering costs. These efforts are likely to have an incremental effect on top-line and bottom-line growth, positioning the company to ride the growth curve.

Essex Property maintains a healthy balance sheet and enjoys financial flexibility. As of Dec. 31, 2024, the company had $1.3 billion of liquidity through an undrawn capacity on its unsecured credit facilities, cash, cash equivalents and marketable securities. In the fourth quarter of 2024, its net debt-to-adjusted EBITDAre was 5.6X. Over the years, it has made efforts to increase its unencumbered net operating income (NOI) to an adjusted total NOI, which stood at 92% at the end of the fourth quarter of 2024. With a high percentage of such assets, the company can access secured and unsecured debt markets and maintain availability on the line.

Solid dividend payouts are arguably the biggest attraction for REIT investors, and Essex Property has been steadily raising its payout. The company has increased its dividend five times in the last five years, and its five-year annualized dividend growth rate is 4.22%. With a low dividend payout ratio and decent balance sheet strength, the dividend payment is expected to be sustainable over the long run.

Shares of this residential REIT, carrying a Zacks Rank #3 (Hold), have risen 10.4%, outperforming the industry’s growth of 4.7% in the past month.

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What’s Hurting ESS?

The struggle to lure renters will persist, as supply volumes are likely to remain elevated in some of the markets where the company operates in the upcoming period. In addition, Essex Property faces competition from other housing alternatives, such as rental apartments, condominiums and single-family homes. Such a competitive landscape limits the company’s ability to increase rents, restricting its growth momentum to some extent.

Essex Property has a significant concentration of assets in Southern California, Northern California and the Seattle metropolitan area. The company derived 43.4% and 39.2% of its portfolio NOI from Southern California and Northern California, respectively, as of Dec. 31, 2024. This makes the company’s operating results and financial conditions susceptible to any unfavorable fluctuations in local markets.

Despite the Federal Reserve announcing rate cuts in recent times, the interest rate is still high and is a concern for Essex Property in the near term. Elevated rates imply high borrowing costs for the company, which would affect its ability to purchase or develop real estate. The company has a substantial debt burden, and its total debt as of Dec. 31, 2024 was $6.60 billion.

Stocks to Consider

Some better-ranked stocks from the residential REIT sector are UMH Properties, Inc. UMH and Veris Residential VRE, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for UMH Properties’ 2024 FFO per share of 93 cents suggests an increase of 8.1% year over year.

The Zacks Consensus Estimate for Veris Residential’s 2024 FFO per share has risen 7% over the past two months to 61 cents.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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